Learnings from Launching a Venture Capital Fund in S.E. Asia at the Height of COVID-19

Pre-COVID-19, I was involved in putting together a S.E. Asian Seed Fund with Singapore-based VC Vulpes Investment Management, and we were seeing some positive traction.

The fund raise marketing focused on the many positive attributes of the Region:

• Fastest growing economy in the world
• Massive mobile phone penetration/adoption and use
• Most resilient Region in global economic / health disasters and fastest in terms of recovery
• Massive population — especially under 30 years of age
• Increasing size and quality of tech / entrepreneurial talent pool

And then COVID-19 struck.

The world realised this was something different. This was going to be way bigger than MERS or SARS, and many countries began to shut borders. The financial world responded the way it does; it started to price in risk. This time the risk was big, very big, unprecedented big…

Business responded the way business does to this kind of uncertainty and threat. They started to reduce any variable costs they could first, then closed down any activities they thought would not be successful or feasible given the new market conditions and jettisoned any people or fixed costs that they could.

The listed equity markets experienced major adjustments; many early-stage investors experienced carnage within their portfolios particularly if they had exposure to tourism, travel, live events, or any industries supplying, dependent upon, or affiliated with these sectors. For most investors, making major commitments to a new VC Fund was not top of mind and would be deferred until more information on how deep this thing will go and for how long.

It became apparent that this virus was going to impact international travel for a long time. As most countries around the world closed their borders, introduced quarantine periods, and the first countries affected started to see second waves, it was obvious international travel was off the cards.

At this stage, I spoke at length with Field Pickering, the Head of Venture Capital at Vulpes Investment Management:

Should we proceed? Given the financial markets’ uncertainty, investor concern, restrictions on travel, and therefore our ability to get face to face with investors during the capital raising period and the founders during the investment period.

If we were to proceed, what would we need to change?

We appreciated there was short-term investor resistance, however, we believed there would be enough investors who would see this as an excellent time to invest if you invest in the right people/businesses and industry sectors.

Many excellent founders and businesses would require capital at a time when the majority of investors would be spooked like “deers in the headlights.” Founders who were still reliant on investor capital and not sufficiently cashed up would quickly need to raise capital. If we had capital, we could be there for those great founders/businesses, and potentially our investors would benefit from lower valuations.‍

We decided to go for it.

We reduced the fund size, shortened the investment period (to twelve months), and launched as a “Special Opportunities Fund.”

With Field, Jani Rautiainen (an experienced entrepreneur, investor, and CoFounder of Property Guru), and myself as Venture Partners, we launched the Vulpes Special Opportunities Fund.

We also decided to broaden the fund mandate from seed only to focusing on great founders with great (post-COVID-19) businesses in S.E. Asia from the Seed stage through to late Series A.

The fund capital was raised in an 8–12-week period.

Now it was time to start investing:

It is critical to invest in the right founders (this has always been our primary investment criteria, so no change required), but also to invest in the right industry sectors. This required new consideration, as different sectors would be impacted in different ways, to different extents, and over different timeframes.

We felt confident that the S.E. Asia and Pacific regions would weather COVID-19 better and recover significantly faster than many other geographic regions.

So, what have we learned so far?

We quickly saw an opportunity to reduce our buy-in valuations by encouraging Founders to source us some secondaries from existing early investors at a discount. Many existing investors welcomed the opportunity to sell some or all of their parcels due to either financial distress or just wanting to lock in some of their gains, given the level of financial uncertainty. We invested in the Founders current round but were sometimes able to reduce our buy-in valuation by doing a blend of the current round valuation and some discounted secondaries.

As we kicked off the investment process, we were aware that we would be taking a higher level of risk if we were not meeting the founding teams face to face (due to travel restrictions). Video calls were effective for pitches, but we needed local knowledge for effective due diligence. So, we leveraged our networks. There were founders we had previously invested in and trusted that were happy to get involved. In many cases, it has activated them to assist us in finding and qualifying investment opportunities in regions where we have no physical presence. We also activated our V.C./Investor partners and made a point to engage with the reputable early/existing investors that had been working with the prospective Founders. We were able to explore the Founders reporting frequency, quality, and how effectively they engaged with Advisors, mentors, and coaches etc.

We have found that many of our investee companies are recovering their revenue/growth positions to better than pre-COVID-19 levels as they have benefitted from establishing new revenue lines and have had to operate with dramatically reduced cost bases. Some have been able to increase their rate of growth with a fraction of their previous marketing spend. Time will tell whether this is sustainable in the long term, but for now, some are enjoying a period of enhanced performance.

The sectors we have invested in have been predominantly in sectors that have benefitted from the dramatic growth in demand driven by people working from home and increasing their time online, such as:

• Ecommerce, delivery and logistics and Influencers
• Esports, Online Investing, and Telehealth
• Food delivery and restaurant bookings

Or Enterprise SaaS products experiencing strong trends in digitization such as:

• Fintech, Insurtech, Property tech
• Food security and supply chain
• Customer Experience Solutions
• Like many businesses, during COVID-19, we have had to make changes to operate, and often it has improved our business for the long term. The Fund has made eleven investments in just over six months.

The Fund has the capital to make at least a further eight investments, and we are about to launch another (significantly larger) Fund also focused on S.E. Asia. The new Fund will have a similar mandate but a longer investment period and the ability to follow-on. We are buoyed by the fact that we have developed a reliable and robust network of Founders and V.C. partners throughout the Region and have developed improved systems and processes specific to investing in S.E. Asia.

We expect much higher levels of Venture Capital will flow in to S.E. Asia as other regions are economically challenged and slower to recover. Many may also decide they are overexposed to their own Region. This will see increased activity and some good opportunities for growth in S.E. Asia. Over time this will cause upward pressure on valuations.

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